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| Educomp: Good but pricey |
| Sunaina Vasudev / mumbai Nov 10, 2009, 16:34 IST |
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The company stock, generally regarded a relatively illiquid counter, had outperformed the CNXIT index for the better part of this financial year more than tripling in value between February 09 (Rs 1392 on February 05, 09) and early October 09( Rs 4970 on October 05, 09). However, the improving outlook for the IT sector has seen the index soar while Educomp has distinctly under-performed, inspite of a 1:5 stock-split and good revenue growth this quarter.
Although it has a strong revenue and earnings growth outlook (over 50% CAGR over the next two years by Citi and Edelweiss estimates), the stock was seen as expensive by a Citi research report at Rs 800 levels (post-split and at a P/E valuation of about 30x FY10 consensus analyst EPS estimates) .
Apart from valuations, the red flags mentioned were its high capex requirements with regard to organic business as well as for its recent acquisitions, higher competitve intensity in the future and potential regulatory issues regarding school fees by state governments. Revenue growth is also expected to moderate because of a high base.
The stock has been under pressure in the last few days and was down 9% in the day, closing at Rs 718.55 on November 10, 09.
Higher revenue growth
Educomp saw revenues increase 92% y-o-y to Rs 235 crore on a consolidated basis in Q2FY10. EBITDA was up 86% to Rs 100.1 crore from Rs 53.8 crore in Q2FY09. Operating margins however dipped 120 bps y-o-y to 39.5%. However, margins have dropped about 230 bps sequentially over Q1FY10. The main drag on margins was the low profitability of new businesses of higher learning solutions and online and global segments. The school business also saw operating margins dip from over 75% in Q2FY09 to around 25% as higher investment pinched bottom-line. The core school learning solutions saw a 400 bps dip in operating margins y-o-y but improved over the previous quarter by 710 bps. Revenue growth for the segment was about 150% y-o-y to Rs 200 crore this quarter.
Post tax reported profits that were up 300% over Q2FY09 numbers as a result of one-off gains (about Rs 60 crore after hiving off the vocational segment into a JV with Pearson Inc). Yearend profit guidance from the company was Rs 270 crore, up from Rs 210 crore, reflecting this gain. Cash on books is Rs 600 crore while debt is Rs 980 crore, according to Citi. The company had a reported debt to equity ratio of 2.1 at end FY09. It raised about Rs 600 crore in Q1FY09 through a QIP.
Operational changes
The company has changed the business model of its flagship product, Smartclass, from a build own operate and transfer system (BOOT) to an outright buy which it hopes will be less capex intensive and cash flow positive. Smartclass is highly capital intensive as product implementation involves an upfront capex with cash flows accruing over a five year period, according to an Edelweiss report. To improve its cash-flow management, the company plans to securitize the recievables and has in- principle approval from a consortium of banks, including SBI and PNB, for the same. It is also looking to transfer or outsource its Smart Class contracts on a non-exclusive basis enhancing operational efficiency. The net impact of these changes will be to reduce capex while its revenues can be booked upfront.
The company stock currently trades at P/E (price to earnings per share) valuation of 27.7x FY10 and 19.4x FY11 to consensus analyst EPS estimates based on closing price of Rs 718.55 on November 10, 09.
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